Apple Needs to Switch to Subscriptions – Bernstein

Apple’s stock could “re-rate” and tear higher if the company makes a fundamental change to its business and shifts to a monthly subscription model, according to a top Apple analyst, Toni Sacconaghi of Bernstein.

The iPhone maker has historically traded at a relatively low earnings multiple relative to the market as investors see it as a hardware manufacturer.

“We believe that for Apple to trade at a materially higher multiple, it needs to migrate its transactional selling model to a subscription-based model,” wrote Sacconaghi on Tuesday. “As consumers become increasingly accustomed to paying monthly subscriptions, especially for key ‘tech utilities’ (e.g. Netflix, Spotify, Microsoft Office 365), we could imagine Apple implementing a subscription plan of its own.”

“Customers could lease iPhones, iPads, Macs, and services such as iCloud and Apple Music for one ‘low’ monthly fee, and have their hardware upgraded after a certain number of years,” suggested Sacconaghi. “By moving to a subscription model, Apple would be able to lock in recurring revenue streams and freeze the length of replacement cycles, likely leading to a material re-rating of its stock’s multiple.”